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Walter Weber

Supreme Court Bungles False Claims Act Case


Wednesday, June 16, 2010

The Supreme Court recently decided the case of Graham County Soil and Water Conservation District v. U.S. ex rel. Wilson (2010). This case resolved an important question of statutory interpretation in a federal law used to combat fraud. Unfortunately, the Court botched it. (Full disclosure: the American Center for Law and Justice, for whom I work, filed an amicus brief in this case arguing the side the Court rejected.) And while -- in a bizarre twist of fate -- Congress fixed the Supreme Court's mistake a week before it happened, this decision will have negative repercussions on an entire category of otherwise legitimate false claims suits.

A Brief History of the False Claims Act

The federal False Claims Act (FCA), 31 U.S.C. sections 3729-33, is an important tool in the battle against those who file false claims and thereby defraud the federal government (and thus, rob the taxpayer). Ever since it was first enacted in the aftermath of the Civil War, the FCA has not only been an instrument which federal authorities can enforce, but the statute has also authorized private individuals to bring suit -- so-called qui tam actions -- to recover fraudulently obtained funds. As an incentive for their efforts, successful qui tam plaintiffs (called "relators") get a share of the recovered funds.

This private attorney general provision of the FCA has had its ups and downs.

At first, the private cause of action was too broad. As the Supreme Court held in U.S. ex rel. Marcus v. Hess (1943), the FCA as originally drafted allowed private parties to sue for fraud even if all they did was copy the allegations from an already filed federal indictment. That reading of the FCA allowed opportunistic plaintiffs to act as "parasites," siphoning off a portion of the federal government's recovery.

Congress responded by narrowing the private right of action, but this time the law became too narrow. Congress barred any action based upon information already in the possession of the federal government. This sweeping bar precluded legitimate suits by those who had discovered frauds. In perhaps the most notorious example, a federal court of appeals disallowed a qui tam suit by the state of Wisconsin because Wisconsin, which had itself discovered the fraud, had already reported the fraud to the federal government (as it was legally obligated to do).

Striving for the "golden mean," Congress again amended the FCA in 1986.

These amendments were designed to broaden the availability of private enforcement actions -- qui tam suits -- without going overboard. Thus, while Congress abolished the federal government "knowledge" bar, Congress retained provisions designed to prevent parasitic suits that add nothing to the federal government's enforcement of the FCA.

The "Public Disclosure" Bar

In particular, the 1986 amendments provided that if there had already been a "public disclosure" of the pertinent allegations or transactions -- i.e., the false claims -- from certain enumerated sources, then only an "original source" of the information regarding the alleged fraud could bring suit. If there was no "public disclosure," however, then anyone who became aware of the fraud could sue to recover the ill-gotten gains.

As might have been expected, there followed considerable litigation over what counted as a "public disclosure" and who qualified for the exception for an "original source." The answers had considerable importance: alleged perpetrators of fraud could win dismissal of a qui tam case if they could identify some "public disclosure" of the purported fraud. To keep the suit alive, the private plaintiff would then have to establish "original source" status, which meant showing, among other things, that he or she had possessed "direct and independent knowledge of the information" regarding the alleged fraud -- i.e., was some kind of an inside whistleblower, not just an outside scam-hunter. (As a policy matter, both types of fraud relators serve the public fisc by uncovering fraud. As a legal matter, though, insiders enjoyed preferred status.)

Notably, not just any old "public disclosure" would trigger the jurisdictional bar of the FCA. The disclosure had to be from one of the particular sources enumerated in the FCA. These sources were limited to certain hearings, reports, audits, and investigations, as well as the news media. Only disclosures from these sources would potentially bar a qui tam suit. Reading the list of enumerated sources too broadly would unnecessarily hamper private enforcement of the FCA; reading the list too narrowly would arguably bring back the problem of parasitic suits.

The Graham County Case

In the Graham County case, the Supreme Court faced the specific question whether the reference to an "administrative audit" as an enumerated source included state and local administrative audits, or whether instead the reference was exclusively to federal administrative audits.

The Department of Justice filed an amicus brief in Graham County arguing that only federal administrative audits were included in the statutory list of sources, and thus public disclosures in state and local administrative audits would not pose an obstacle to private qui tam actions.

The DOJ's argument was exactly correct. The goal of Congress in enacting the 1986 amendments was to abolish the prior, restrictive "federal government knowledge" standard -- which barred qui tam suits whenever the federal government had possession of the pertinent information -- and replace it with the much more qui tam-friendly "public disclosure" standard -- which essentially barred suits only where the federal government was not just in possession of the information but was actively pursuing, or likely to pursue, that information. To add state and local audits, reports, investigations, and hearings as obstacles to qui tam suits would have made absolutely no sense.

The focus of Congress was on the federal government, not state and local matters, matters that may not even come to the federal government's attention. Congress made this clear both before and after the enactment of the 1986 amendments in statements from the lead Senate and House sponsors of the amendments. And, when various lower courts divided over the question, Congress stepped in with an amendment in 2010, included as part of the healthcare reform bill, that clarified that Congress meant only federal government sources to count for purposes of "public disclosures."

One week after Congress legislatively settled the question, the Supreme Court issued its decision in Graham County. Dividing 7-2, the Supreme Court concluded that, contrary to what Congress just said, state and local sources of disclosures did count under the unamended version of the FCA. (The Court relegated the week-old congressional amendment to irrelevancy in a footnote, saying the bill was not expressly retroactive.) The majority said that arguments about policy, purpose, and legislative history were not persuasive. What controlled, the Court said, was the plain text of the statute. (Curiously, the Court did not divide along predictable lines, viz., "textualist" vs. "non-textualist" schools of thought. Justice Stevens wrote the majority opinion for seven members of the Court, while Justice Sotomayor, joined by Justice Breyer, wrote the dissent.)

The Court declared that it saw no convincing textual argument for reading the word "administrative" to mean only "federal administrative." Respondent -- the qui tam plaintiff -- had argued that the term "administrative" was sandwiched between the indisputably federal terms "congressional" and "Government Accounting Office" and therefore, under the canon of noscitur a sociis (a word is known by its neighbors), the term "administrative" should likewise be read as a federal reference. The Court disparaged this argument as the "Sandwich Theory" and said that the better approach was to view, not just the terms immediately adjacent to "administrative," but the larger group of sources listed in the FCA's "public disclosure" section. This group included "civil, criminal, or administrative hearing[s]," a category of sources with no explicit federal modifier.

Where the Court Went Wrong

The Court was right to look beyond the particular phrase that included the term "administrative"; however, the Court erred by not looking far enough.

If the Court had only looked to other adjacent subsections of the FCA, it would have seen that the references to civil, criminal, and administrative hearings, as well as the reference to administrative audits and investigations, was indeed strictly federal. In other words, if respondent's argument was the Sandwich Theory, the Court's approach was the Ignore the Rest of the Menu approach.

In particular, the preceding section (31 U.S.C. section 3729(a)) referred to a "criminal prosecution, civil action, or administrative action . . . commenced under this title" and to an "investigation" into fraud. These references were, in context, exclusively federal in nature -- an action "under this title," for example, had to be an FCA action. Moreover, the point of the listed sources was similar -- whether a fraud perpetrator could get more lenient treatment as a whistleblower because the material was not yet being pursued or investigated by the federal government.

That's not all. The subsections immediately preceding the "public disclosure" bar, namely, section 3730(c) and (d), likewise had parallel references to the sources at issue. Subsection (c) referred to a "criminal or civil investigation or proceedings" synonymously with "the Government's investigation or prosecution of a criminal or civil matter arising out of the same facts." And subsection (d) used the phrases "criminal, civil, or administrative hearing" and "congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media" -- language indistinguishable from the list of sources in the "public disclosure" provision in subsection (e) -- in setting the percentage bounty to a successful qui tam plaintiff.

In each of these other neighboring sections or subsections, the parallel phrase had no explicit federal modifier, but in context clearly meant federal proceedings or investigations. Thus, subsections 3729(a) and 3730(c), (d), and (e) each refer to civil, criminal, and administrative hearings and investigations, without using the express term "federal," but in a context plainly referring exclusively to federal sources. The list of sources in the "public disclosure" provision is thus nestled amidst a series of parallel, exclusively federal, references to the same sources.

It would be illogical -- and counter to the usual rules of statutory interpretation -- to read the same or virtually same terms in adjoining sections to be exclusively federal in some cases yet inclusive of state and local entities in others. Yet that is the result of the Court's holding in Graham County.

A Misstatement in a Reply Brief Carries the Day?

How did the Court explain this textual argument away? It didn't. In fact, the Court did not even mention this argument, even though it was laid out in an amicus brief (the ACLJ's) that the Court twice cited for other arguments.

There may be an explanation. Petitioners -- the qui tam defendants, the alleged perpetrators of the fraud -- in their reply brief asserted that the Court should ignore the parallel language in section 3729 for a very good reason: that language was not enacted until Congress passed some statutory amendments to the FCA in 2009; thus, this after-enacted language sheds no light on the meaning of the 1986 FCA amendments.

This was an extremely powerful, indeed decisive rebuttal argument. The only problem was, it was flatly inaccurate. In fact, the parallel language in section 3729 (and, for that matter, in 3730) was enacted contemporaneously with the public disclosure bar in 1986.

The amicus ACLJ advised petitioners' counsel of this fairly grievous mistake, and petitioners' counsel graciously and apologetically acknowledged the error and agreed to have a letter sent to the Court explaining as much -- but the Court never got the message. The Supreme Court clerk's office apparently has a policy not to circulate to the Justices letters from private amici, so the correction letter the ACLJ promptly sent in was not relayed to the Court. The point unfortunately did not come up at oral argument, and apparently the Justices believed the ACLJ's strong textual argument -- the argument from parallel usage in adjacent subsections of the statute -- was off the table. (Indeed, even the dissent did not use the argument, despite the fact that it supported the dissent's position.) And so the Court ruled that the reference to "administrative" was not exclusively federal, meaning that state and local audits, reports, and investigations can be used to fend off private suits over actual frauds.

Boon to Fraudsters

In so ruling, the Graham County Court erected new obstacles to the valuable private enforcement mechanism of qui tam suits, and thus disserved both the taxpayer (whose funds were being obtained by false claims now left unredressed) and the federal government (which has neither the time nor the personnel to pursue all frauds, and thus benefits greatly from private enforcement actions).

It is true that Congress has fixed this problem, at least as to frauds committed from now on. See Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111-148, 124 Stat. 119 (2010), section10104(j)(2) (adding explicit modifier "Federal" to FCA list of "public disclosure" sources). But the Court's error in Graham County will pose a major hurdle to any pending case, as well as any cases brought on the basis of frauds committed prior to the enactment of the corrective amendment. (Full disclosure: ACLJ attorneys represent a qui tam plaintiff is such a pending case.)

Congress can still fix the problem by adding what is now missing: an explicit declaration of the effective date of the latest amendment, namely, specifying that the 2010 amendment applies to all pending and future suits under the FCA. Until that happens, though, Graham County will hamper not only pending qui tam actions but presumably all future qui tam suits filed in pursuit of funds obtained by false claims submitted to the federal government prior to the effective date of PPACA.

Walter M. Weber is Senior Litigation Counsel at American Center for Law and Justice.

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